Economics: Chapters 14 & 15

*Scenario 14-2* Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. *Refer to Scenario 14-2.* As a result of Kristy's deposit, Bank A's required reserves increase by

$2,000.

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease.

An increase in interest rates

decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics.

The Federal Reserve System's four monetary policy goals are

price stability, high employment, economic growth, and stability of financial markets and institutions.

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

use open market operations to buy Treasury bills

Soldiers in a World War II prisoner-of-war camp

used cigarettes as money.

Economies cannot function without money.

False

Expansionary monetary policy refers to the Fed's increasing the money supply and increasing interest rates to increase real GDP.

False

If gold is used as money in an economy, the money supply is easy to control.

False

Since World War II, the Federal Reserve has not been involved in carrying out monetary policy.

False

The narrowest official definition of the money supply is

M1.

One of the monetary policy goals of the Federal Reserve is price stability.

True

When the Federal Reserve increases the money supply, people spend more because interest rates fall.

True

Contractionary monetary policy on the part of the Fed results in

a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Silver is an example of a

commodity money.

To increase the money supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

The purchase of Treasury securities by the Federal Reserve will, in general,

increase the money supply.

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

increase.

An increase in the interest rate

increases the opportunity cost of holding money.

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

interest rates.

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

The main tool that the Federal Reserve uses to conduct monetary policy is

open market operations.

If the central bank can act as a lender of last resort during a banking panic, banks can

satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.

The Federal Reserve was established in 1913 (and started operating in 1914) to

stop bank panics by acting as a lender of last resort.